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FIN 300 Lecture Notes - Lecture 2: Cash Flow Statement, Reserve Requirement, Cash Flow

183 views3 pages
cerisegiraffe538
21 Sep 2015
School
Ryerson University
Department
Finance
Course
FIN 300
Professor
Yi Feng

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Document Summary

Fin300 - lecture #2: sources and uses of cash, cash flow statement, common- size statements, ratios, du-pont identity cash flow from assets = cash flow to creditors + cash flow to owners. Sources of cash: a firm"s activities that generate cash. Sell assets - current assets, fixed assets. Borrow $, issue shares - long-term debt, accounts payable, equity. Uses of cash: a firm"s activities in which cash is spent. Buy assets current assets, fixed assets - in left hand side (assets) Make payments accounts payable, notes payable, long term debt, equity - in right hand side (liability, equity) Statement of financial position shown as percentage of assets & income statements as percentage of sales. Presents all items relative to a certain base year amount. Relationships determined by a firm"s financial info and used for comparison purposes. Short term solvency/liquidity - focuses on current assets, current liabilities. Long term solvency/financial leverage - measure debt, equity, assets at book value.

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Related Questions

Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income

Thank you in advance for your help. If you will, please explain to me how you came up with the answer for "a". I wasn't sure where to look. I can see the differences in balance sheets.

Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data.

Balance Sheets 2013 2014

Assets

Cash $ 52,000 $ 57,600

Accounts receivable 402,000 351,200

Inventories 836,000 715,200

Total current assets $1,290,000 $1,124,000

Gross fixed assets 527,000 491,000

Less accumulated depreciation 166,200 146,200

Net fixed assets $ 360,800 $ 344,800

Total assets $1,650,800 $1,468,800

Liabilities and Equity

Accounts payable $ 175,200 $ 145,600

Notes payable 225,000 200,000

Accruals 140,000 136,000

Total current liabilities $ 540,200 $ 481,600

Long-term debt 424,612 323,432

Common stock (100,000 shares) 460,000 460,000

Retained earnings 225,988 203,768

Total equity $ 685,988 $ 663,768

Total liabilities and equity $1,650,800 $1,468,800

(continued)
Income Statements 2014 2013

Sales $3,850,000 $3,432,000

Cost of goods sold (3,250,000) (2,864,000)

Other expenses ( 430,300) ( 340,000)

Depreciation ( 20,000) ( 18,900)

Total operating costs $3,700,300 $3,222,900

EBIT $ 149,700 $ 209,100

Interest expense ( 76,000) ( 62,500)

EBT $ 73,700 $ 146,600

Taxes (40%) ( 29,480) ( 58,640)

Net income $ 44,220 $ 87,960

EPS $0.442 $0.880

Statement of Cash Flows (2014)

Operating Activities

Net income $ 44,220

Other additions (sources o f cash)

Depreciation 20,000

Increase in accounts payable 29,600

Increase in accruals 4,000

Subtractions (uses of cash)

Increases in accounts receivable ( 50,800)

Increase in inventories (120,800)

Net cash flow from operations $( 73,780)

Long-Term Investing Activities

Investment in fixed assets $( 36,000)

Financing Activities

Increase in notes payable $ 25,000

Increase in long-term debt 101,180

Payment of cash dividends ( 22,000)

Net cash flow from financing $104,180

Net reduction in cash account $( 5,600)

Cash at beginning of year 57,600

Cash at end of year $ 52,000

(continued)
Other Data 2014 2013

December 31 stock price $6.00 $8.50

Number of shares 100,000 100,000

Dividends per share $ 0.22 $0.22

Lease payments $40,000 $40,000

Industry average data for 2014:

Ratio Industry Average

Current 2.7x

Quick 1.0x

Inventory turnover 6.0x

Days sales outstanding (DSO) 32.0 days

Fixed assets turnover 10.7x

Total assets turnover 2.6x

Debt ratio 50.0%

TIE 2.5x

Fixed charge coverage 2.1x

Net profit margin 3.5%

ROA 9.1 %

ROE 18.2%

Price/earnings 14.2x

Market/book 1.4x

Assume that you are Donna Jamison’s assistant and that she has asked you to help her prepare a report that evaluates the company’s financial condition. Answer the following questions:

a. What can you conclude about the company’s financial condition from its statement of cash flows?

b. What is Computron’s inventory turnover, day’s sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firm’s utilization of assets stack up against that of the industry?

c. What are the firm’s debt, times-interest-earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?

d. Calculate and discuss the firm’s profitability ratios—that is, its net profit margin, return on assets (ROA), and return on equity (ROE).

e. WHAT ARE COMPUTRON’S INVENTORY TURNOVER, DAYS SALES OUTSTANDING, FIXED ASSETS TURNOVER, AND TOTAL ASSETS TURNOVER RATIOS? HOW DOES THE FIRM’S UTILIZATION OF ASSETS STACK UP AGAINST THAT OF THE INDUSTRY?